Last Updated on August 22, 2022 at 11:14 pm
We look at how actively managed smallcap mutual funds have performed with respect to the Nifty Next 50 (NN50) Total Returns Index. This is a natural follow up to midcap funds vs NN50 study in which we found only three midcap mutual funds have beat Nifty Next 50 consistently over every possible 3,4 and 5 year periods.
Why is this comparison made: Nifty Next 50 has a risk and reward almost identical to that of the Nifty Midcap 150 Index. In fact, Nifty Next 50 is a bit more volatile. See: Worried about Nifty Next 50 Index? What you need to know. Also, we found that Small cap funds struggle to beat Nifty Midcap 150 index: Why your small cap mutual fund must beat this benchmark! This naturally leads to a comparison of NN50 with smallcap funds.
Although Nifty Next 50 is “technically” part of the large cap universe, it is illiquid and therefore quite volatile as explained before Warning! Even “large cap” stocks are not liquid enough! Can you handle this?
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We shall consider rolling returns. That is, we shall compare every possible 1,2,3,4 and 5 year return periods possible from January 1st 2013 (from the inception of direct plans) to June 19th 2020. We shall only consider funds that have enough history to generate 1000 or more 1,2 and 3-year rolling return data points. This is the full list of 21 smallcap funds considered for the study.
| Franklin India Smaller Companies Fund – Direct – Growth |
| DSP Small Cap Fund – Direct Plan – Growth |
| HSBC Small Cap Equity Fund – Growth Direct |
| Kotak-Small Cap Fund – Growth – Direct |
| Reliance Small Cap Fund – Direct Plan Growth Plan – Growth Option |
| Sundaram Small Cap Fund – Direct Plan – Growth Option |
| Aditya Birla Sun Life Small Cap Fund – Growth – Direct Plan |
| Quant Small Cap Fund-Growth Option-Direct Plan |
| ICICI Prudential Smallcap Fund – Direct Plan – Growth |
| SBI Small Cap Fund – Direct Plan – Growth |
| Axis Small Cap Fund – Direct Plan – Growth |
| L&T Emerging Businesses Fund – Direct Plan – Growth |
| Union Small Cap Fund – Direct Plan – Growth Option |
| HDFC Small Cap Fund – Direct Growth Plan |
| IDBI Small Cap Fund – Growth Direct |
| Invesco India Smallcap Fund – Direct Plan – Growth |
| Tata Small Cap Fund-Direct Plan-Growth |
| BOI AXA Small Cap Fund Direct Plan Growth |
| Edelweiss Small Cap Fund – Direct Plan – Growth |
| Canara Robeco Small Cap Fund – Direct Plan- Growth Option |
| Principal Small Cap Fund – Direct Plan – Growth Option |
Among these, IDBI Small Cap Fund, Invesco India Smallcap Fund, Tata Small Cap Fund; BOI AXA Small Cap Fund; Edelweiss Small Cap Fund; Canara Robeco Small Cap Fund; Principal Small Cap Fund were removed as the no of rolling return one-year data points were less than a thousand (young funds with short history). These funds are indicated in red above.
Five years: 6/14 funds have outperformed Nifty Next 50 (NN50)with a consistency of 70% or more. For example, Franklin India Smaller Companies Fund got a better return than NN50 over five years 405 out of 604 times or 67% of all studied periods. Let us call this performance consistency. Note: these funds had less than 500 data points. More history is required.
| SBI Small Cap Fund – Direct Plan – Growth |
| Axis Small Cap Fund – Direct Plan – Growth |
| L&T Emerging Businesses Fund – Direct Plan – Growth |
| Union Small Cap Fund – Direct Plan – Growth Option |
| HDFC Small Cap Fund – Direct Growth Plan |
Four years: Only 4/14 funds managed 70% or more performance consistency!
Three years: Only 3/14 funds managed 70% or more performance consistency!
Two years: Only 4/14 funds managed 70% or more performance consistency!
One year: Only 2/14 funds managed 70% or more performance consistency!
These are the three smallcap funds that qualified as above over 5,4 and 3 years:
| SBI Small Cap Fund – Direct Plan – Growth |
| Reliance Small Cap Fund – Direct Plan-Growth |
| L&T Emerging Businesses Fund – Direct Plan – Growth |
Even if we consider trailing returns, over the last year, only 5 out of 21 smallcap funds have managed to outperform Nifty Next 50 TRI. That is, get a less negative return.
What do these results mean? As in the midcap vs NN50 study, it is simply impossible to be invested in a smallcap fund that even “typically” beats NN50 or Nifty MIdcap 150 (which is tougher to beat than a smallcap index). Therefore, the central conclusion of this study is the same:
A mix of Nifty and Nifty Next 50 index funds is all that a retail investor needs to gain exposure across large, mid and small cap segments of the market.
Or in other words, those who want to have smallcap (or midcap) exposure need not look beyond Nifty Next 50 passive funds. See: Combine Nifty and Nifty Next 50 funds to create large, mid cap index portfolios and What is the best way to invest in Nifty Next 50 Index? and ICICI Nifty Next 50 Index Fund vs Reliance ETF Junior BeEs
Investors are better off with a Nifty Next 50 index fund than Motilal Oswal Nifty Smallcap 250 Index Fund or Motilal Oswal Nifty Midcap 150 Index Fund, or any other active smallcap or midcap funds since it is impossible to predict which active fund would outdo NN50 in future.